GEORGE Osborne has warned Greece that backing a bailout is "crucial" as European leaders prepared to hold emergency talks about the unravelling rescue deal today.

The decision to stage a referendum on the package has already sent shockwaves through international financial markets and the country's government was on the brink of political collapse today as the ruling party tore itself apart over the move.

The Chancellor warned that the global recovery depended on the agreement going through.

German chancellor Angela Merkel and French president Nicolas Sarkozy will meet the IMF and Greek prime minister George Papandreou today to thrash out ways to stem the turmoil.

Downing Street confirmed the UK would be involved in discussions in the "margins" of the G20, which starts tomorrow, about the eurozone package agreed last week.

A spokesman said implementing the deal agreed at the Brussels summit would require "further conversations".

Mr Papandreou stunned the markets on Monday night with a surprise announcement that he intended to put the deal hammered out by EU leaders in Brussels, which would impose a harsh austerity programme on the country, to a referendum.

The move was unanimously backed by his cabinet during the early hours of this morning following a seven-hour meeting, with a government spokesman announcing the vote had the "total support" of ministers and would be held "as soon as possible".

EU leaders agreed with banks a 50 per cent "haircut" on Greek debt and to boost the eurozone bailout fund to £870billion (£1trn euros), which follows an earlier decision to shore up banks' finances.

Fears that a "no" vote could trigger a disorderly default by Greece on its debts sparked a slump globally.

Banks like Barclays and Royal Bank of Scotland were hit hard as the Ftse 100 Index in London fell more than 2.0 per cent, or 122.7 points, to 5421.6.

There were even bigger losses on the European markets, where the Cac-40 in Paris and the Dax in Frankfurt were down 5.0 per cent.

Jordan Lambert, trader at Spreadex, said: "Considering how persistently Greece and Germany have pushed for this long-awaited deal, it seems quite unnecessary to risk undoing all the progress to date."

Mr Papandreou's surprise move - which Downing Street learned of from media reports - prompted one Greek MP to quit, leaving the ruling Pasok party with a majority of just two.

Osborne said there was "no doubt that the decision of the Greek prime minister has added to the instability and uncertainty in the eurozone".

He told the Commons: "Now ultimately it's up to the Greek people and the Greek political system to decide how they make their decisions, but I would say it is extremely important for the eurozone to implement the package that they agreed last week.

"That is what I said was crucial at the time, that's what they all said was crucial at the time and I think we need to get on with it sooner rather than later."

Mr Sarkozy, who is hosting the G20 leaders in Cannes, said: "This announcement surprised all of Europe.

"Giving the people a say is always legitimate, but the solidarity of all countries of the eurozone cannot work unless each one consents to the necessary efforts."